California Pension Death Star Approaching

Contributed by Chriss Street.Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

CPPC’s analysis used data from the most recent county Actuarial Valuations to produce four core restatements of solvency – total pension debt, unfunded pension debt, government normal yearly contributions, and amortization payments of unfunded pension. CPPC determined that for the four adjustments Moody’s is expected to make – two would have very significant impact on county solvency:

First, pension debt would be adjusted using a high-grade long term corporate bond rate (5.5% for 2010-2011) instead of a Pension Fund’s target rate of return (7.75% more or less)

In their Actuarial Valuations, the counties claim they have conservatively banked 78% of their pension liabilities in cash and securities, leaving only $4 billion in under-funding. But with the Moody’s adjustments will increase the unfunded pension obligations by $6 billion, balloon the unfunded liability to $10.2 billion and the cash and securities funding down to a speculative level of 58%.

At a 78% funding level, the six counties are only required to contribute 29% of their payroll, or about $640 million, to fund their pension plans each year. But under the new Moody’s formula that will drive down their funding level to 58%, the counties required annual pension cost will sky-rocket to 63% of payroll, or $1.4 billion per year!